The charts are pretty grim when it comes to the share prices of major satellite operators. During a Monday morning discussion between financial analysts at the SATELLITE 2018 Conference & Exhibition, Northern Sky Research (NSR) President Christopher Baugh pointed out that, despite the industry’s massive technological advancements, investors are generally much less bullish on Fixed Satellite Service (FSS) stocks than in previous years.
According to Justin Cadman, Raymond James’ former senior vice president of investment banking, the biggest contributor to the decline is the “dramatic change in capital expenditure per Gigabit per second.” High Throughput Satellites (HTS), and soon Low and Medium Earth Orbit (LEO/MEO) broadband constellations, are bringing more bandwidth online than ever before. But that doesn’t necessarily mean the demand is there to absorb all that extra capacity. “Part of [the problem] is their model today is dependent on that wholesale sale of capacity,” Cadman said.
Investors have kept a close eye on satellite companies as new technologies have disrupted traditional business models. Their overall concern, according to Wells Fargo Vice President of Equity Research Andrew Spinola, is that operators will continue to saturate their historical markets while struggling to recoup their investments from those same customers. “Investors are quite worried that ... the demand won’t be there, so that capacity falls back onto existing markets,” he said. And in order for an industry to be healthy, it must be able to generate returns on capital, Cadman added. “Growth is important. None of us want an industry with eroding top lines,” he said.
The crux of the issue is that customers won’t always shell out for bigger bandwidth packages just because they’re offered at a lower price point. Instead, many will elect to keep the same bandwidth rates while “[pocketing] the savings,” Spinola said. This inelasticity of demand does not bode well for revenue-hungry satellite operators — so what’s the next best step to take?
One solution, the analysts agreed, is to focus that additional capacity on untapped verticals or applications where satellite has an inherent advantage, such as maritime or In-Flight Connectivity (IFC). “Incumbent markets will continue to go sideways — it’s these new markets that are much more interesting,” Spinola said.
In particular, Cadman said he is watching to see if the satellite industry will continue to converge with telcos over the 5G proposition, which could “bring substantial demand.” Spinola said he is also very bullish on C-band spectrum as a medium- to long-term revenue source in the United States for similar reasons.
Ironically, although technology is the reason some operators are in this sticky situation, innovative advancements on the horizon could also be the solution. The panelists pointed to in-orbit servicing as one means for operators to squeeze the most out of their existing assets, enabling them to put their capex toward new, potentially more profitable business ventures. Improved hardware on the ground side, such as flat panel antennas, could also be a major gamechanger for operators competing against Mobile Network Operators (MNOs). “Anything smaller, cheaper and faster is great to make this industry competitive against telcos,” Spinola said.
“If development [of low-cost ground terminals and equipment] continues and those types of technologies become widely available and useful for satellite-based applications, I’d be very optimistic,” Cadman added.
In some circumstances, the best option may simply be to collapse the supply chain, suggested Wim Steenbakkers, global head of satellite finance at ING Wholesale Banking. Although some companies have been “sticking to their guns,” absorbing a downstream service provider could unlock new opportunities to buoy their top lines, Steenbakkers said. Overall, the panelists unanimously predicted the satellite industry will see significant consolidation over the next two years or so, as top line growth remains restrained.
“The landscape of the value chain for satcom has been traditionally the operators, the service providers and then the customer. In this brave new world with HTS and the forthcoming LEO/MEO constellations, some of that will change, and I don’t necessarily know if that’s a bad thing,” Cadman said.
“There are way too many players. When you have 10 CEOs that all think they’re going to get 30 percent of the market, it’s a terrible place to be,” Spinola added. “I think it’s going to happen when there’s desperation.” VS